Benefit Estimation: Value and Approach

1. NOS Economic Studies Presentation to the NOAA Hydrographic Services Review Board, version 2, September 17, 2015 Irv Leveson Leveson Consulting

2. Outline • Benefit Estimation: Value and Approach • Some Benefit Studies • Lessons and Research Needs • References • Supplementary Slides

3. Benefit estimation: Value and approach

4. Economics Is a Behavioral Science • Uses of economics include: • Examining customer responses to availability of services • Assessing responses of suppliers to changes in technology and markets • Providing a framework and methods for valuation of benefits and costs • Analysis of behavior of markets and market participants is a critical part of benefit estimation

5. Value of Benefit Information • Informing policy-making by: • Enhancing understanding of applications, constituents, markets, returns on investment, and costs for effective planning and resource allocation • Support for program planning, architecture assessment, budgeting and legislation • Assessing outcomes of long-term initiatives or developments • Providing a baseline for determining gain or loss of benefits from alternative developments • Advancing recognition of the contributions of the program • The impact of benefit information on its users depends on constant reinforcement – repetition and demonstration of use in specific contexts

6. Valuation and the Analytic Process • There is a need to specify expected outputs and outcomes against which results can be evaluated • Results should be related to initiatives in services, technology, distribution, etc. to see what is working, not just how well a program is working • Values placed on types of outcomes should be consistent across programs • Scenario planning can clarify the ways outcomes depend on overall themes as well as component trends that produce those themes • In valuing new products it can be useful to include extrapolation from other experiences, not just past behavior of the same program • Institutionalizing the analytic process

7. Economic Impact vs. Economic Value Economic Impact • Direct economic impact refers to measures of the importance of sectors that are using a good, service or technology. It is measured by revenue, expenditures or value added • Value added subtracts the costs of purchased inputs from a sector’s revenue to provide a measure of the resources used from that sector. It avoids double counting due to purchases of one sector from another when magnitudes for multiple sectors are to be combined Economic Value • Economic value is the addition to the value of the economy from the provision of a good or service or the introduction of a technology • Benefits are measured relative to what would have been expected if the service or technology did not exist • Direct economic value is the increase in value in using sectors • Total economic value includes increases in value to suppliers and value induced in the rest of the economy

8. Measures of Economic Value • Productivity and cost savings, including • Productivity gains • Cost reduction • Avoided costs • Value of time saved • Willingness to pay and willingness to accept • Consumer surplus (value to consumers above the amount paid) • When benefits are measured by productivity or willingness to pay, consumer surplus is included • Producer surplus (value to producers above the amount received) • Producer surplus is included in revenue • Effects on value of property • Value of information – benefits of alternative choices with knowable probabilities of outcomes

9. Economic Values Can Be Assigned to Life and Health • Health and safety improvements can be assigned dollar values based on reductions in loss of income, medical costs, injury, disability, and lost lives • Savings in lives is measured by economists as the value of a statistical life (VSL) • VSL is used to compare risks associated with small changes in probabilities of death for large groups. It is not intended to be used to assign values to the worth of individuals • VSL has been estimated in many studies, notably of the higher incomes people are willing to accept to go into risky occupations • A wide range of estimates are in use • Federal agencies issue guidelines that typically value one lost life at around $10 million • OMB has reportedly recommended using no less than $5 million • There has been a great deal of inflation in the numbers used • Values assigned to injury depend on severity • For example, FAA guidelines value a severe injury at 26.6% of a fatal injury and a critical injury at 59.3% of a fatal injury

10. Comparison with Alternatives(counterfactuals) • The most common method of assessing value is as the additional benefits compared with benefits of an earlier technology or service that was in use when the new technology or service became available • If technological change or market conditions have been presenting other opportunities since that time, other alternatives would have been expected to evolve in the absence of the new capabilities. Benefits of the new technology or service can be compared with those alternatives • These “dynamic counterfactuals” require development of scenarios for technologies and markets • Dynamic counterfactuals are especially appropriate 1) when other technologies or services were already developed or in partial deployment at the time the technology or program being studied became available, or 2) when strong pressures would have motivated development of an alternative to the earlier technology or service • While scenarios about alternatives that would have evolved are subject to uncertainty which reduces precision, they can provide a more accurate measure of incremental benefits than assuming older technologies would have remained in use • Failure to take into account benefits of expected technology and market changes can result in a large overestimate of benefits

11. Allocating Benefits among Programs • Often benefits are the result of contributions of multiple program elements, programs or technologies • For example, obtaining benefits of electronic nautical charts depends ship bridge systems, GPS, weather information and communications • There is usually no scientific way to allocate benefits among contributors. Nevertheless, judgments must be made • Basing allocations on assessment of several experts can increase acceptance but may not increase reliability • Sometimes it is possible to measure incremental changes in one program when others do not change or to hold changes constant statistically • However, effects of the sum of individual changes may not provide a correct indication of effects when multiple programs or inputs change at the same time • Implications of alternative allocations should be tested when estimates are used to see if decisions would be affected

12. Allocation of Costs • When multiple outcomes result from one service or multiple programs, available allocations of costs can be unreliable • Costs include the user’s time, regardless of whether the user is a business, government or household • Allocation of program costs within an agency can be subject to error because of accounting conventions or the organization’s practices. Agencies can help in sorting that out • Difficulties have led some studies to concentrate on gross benefits – benefits before subtraction of costs • Use of gross benefits does not allow a benefit/cost ratio to be computed but it can indicate importance relative to other programs • Combined benefit and cost estimates for jointly operating programs may still be useful in making comparisons with other programs

13. Some benefit studies

14. Benefits of Nautical Charts • An estimate of the willingness to pay for electronic nautical charts as $42.8 million above the value of paper charts for commercial and recreational boating was made by Kite-Powell (2007) using data from a survey of boaters in 2005-2006 • Benefits were measured by consumer surplus, not total willingness to pay • Since benefits are those above paper charts, they do not include benefits of the data collection and charting required to produce paper charts that also is used in electronic charts • Benefits applied to “ideal” electronic charts rather than the then currently available charts • In a 2012 scoping study of the NOS Coastal Mapping Program benefits, Leveson updated the estimates to 2011 based only on industry size, added commercial fishing, and calculated total benefits including spending and consumer surplus of $236.2-$262.5 million • Willingness-to-pay likely includes some safety as well as economic benefits to users. However, it may not put full value on the economic benefits to others. These influences were assumed to be offsetting in taking the total to be economic benefits • In a 2014 study of GPS benefits, Leveson made a rough allowance for the subsequent increased use of capabilities that were available in 2005 and the increase in the number of systems and capabilities between 2005 and 2013, which resulted in benefits of $354-$525 million

15. The Leveson 2012 Coastal Mapping Program Benefits Scoping Study Used a Number of Methods • Nautical Chart Production • Commercial vessels – willingness to pay • Recreational boating– willingness to pay • Recreational fishing– willingness to pay • Change Analysis – benefits to ports based on construction • Boundary Determination and Legal Aspects • Avoidance of delays in offshore oil and gas production • Avoidance of delays in offshore wind power • Reduction in the cost of title insurance • Shoreline Imagery – value of page requests • Digitally Reproduced Historic Imagery – value of page requests • Emergency Response Imagery – contribution to willingness to pay for weather information

16. Estimates for Coastal Mapping Program Nautical Chart Production • Commercial vessels and recreational boating – updated willingness to pay for ideal charts based on Kite-Powell and current number of vessels • Commercial fishing – willingness to pay conservatively assumed to be half that of commercial boaters • The CMP contribution to the value of nautical charts was taken to be 35%-40% of the total based on analysis of the CMP share of vertices in selected charts CMP contribution $41.3-$52.5 million Midpoint $46.9 million

17. Leveson 2009 Scoping Study of Benefits of CORS and GRAV-D: CORS Analysis • The Continuously Operating Reference Station (CORS) program collects position information shared by users, analyzes it to improve positions and distributes the improved position data • The CORS study built on work by Richard Snay at NGS that assessed the value of the data based on savings over the cost of obtaining it by traditional surveying • The scoping study estimated CORS benefits by adjusting the Snay estimates to account for 1) the extent to which more recent alternatives such as real time networks (RTNs) had become available, and that 2) some users would not have done positioning in the absence of CORS because the information was worth less than the costs of traditional surveying • As a byproduct, the study estimated the value of the National Spatial Reference System by building on revenue for private surveying and mapping, adding assumptions for the government and not-for-profit sectors and adding a factor for societal benefits • Additional analysis would be useful to consider 1) the cost savings from fewer traditional surveys having to be done because the information is shared, and 2) the potential societal value of more and improved information becoming available as a result of the contributions of CORS

18. GRAV-D Analysis • Gravity for the Redefinition of the American Vertical Datum (GRAV-D) is an effort by NGS to re-define the vertical datum of the US, replacing geodetic leveling in large areas with GPS measurements and a gravimetric geoid model to determine orthometric heights more efficiently and accurately than with the current datum • The scoping study estimated partial benefits prior to any extensive implementation based on 1) cost savings from less long line leveling, and from 2) floodplain management, assessing the numbers of structures that may be strengthened or built in other locations with better information, prospects for reduction in flood damage, and possible reduction in loss of life and injury • Further analysis would be useful to consider the benefits of GRAV-D through before and after comparisons of user practices, and savings in costs and other benefits where it has been implemented

19. Lessons and research needs

20. Some Lessons – Guidance • A long term program of studies can be effective in providing a pathway to achieving research objectives • The 2006 NOS Valuation Conference set the stage for some of the work that has been done to date • The involvement of internal personnel is important to success in analyzing programs • Cooperation is fostered when leadership takes an active role, convening staff to contribute information and facilitate obtaining the agency’s own data • Cooperation and assistance of NOAA personnel can be essential in obtaining public and private external data

21. Some Lessons – Research Planning • A major part of any benefit study is improving knowledge of users and applications • It is important for benefit studies to include both economic and non-economic benefits such as those to safety-of-life and the environment • Studying future benefits can help plan programs and provide benchmarks to assess them • It is necessary to be eclectic with regard to methods of measuring benefits • Separating impacts of jointly operating programs or technologies requires rough judgments

22. General Comments on Research Needs • Systematic research is needed to fill in gaps in adoption, productivity and cost savings and safety impacts with comparative before and after studies as well as with case studies • Much more information is needed about private users of services through resellers, imbedded systems, the Internet and mobile devices • Robust studies require major and sometimes multi-year efforts of targeted data collection • Information often needs to be much more granular, taking into account specific functions and technologies across multiple sites • For example, a new preliminary study of the value of tornado warning systems by Benjamin J. Miller compared injuries, fatalities and property damage across counties and decades with the dates of installation of warning transmitters and found large impacts • Lags in data collection and research can lead to significant understatement of the use and benefits of programs

23. Some Study Suggestions • Updated benefits of hydrology • Benefits of nautical charts based on multiple before and after geographic comparisons • Meeting the changing needs of ports • Benefits of GRAV-D in actual operation • Quantitative and interview study of CORS use and wide impacts • Use and benefits of alternative distribution systems, including: • The growing use of mobile devices • Opportunities presented by social media • Responses of markets and programs to spectrum reallocation

24. Supplementary Slides

26. Some GRAV-D Uses • Storm surge modeling • Monitoring sea level rise • Monitoring subsidence, flooding and drought • More accurately measuring the height and flow of water in flat areas to efficiently make use of water resources • Identifying current and long term expected flood-prone areas to guide new construction • Monitoring changes over time in crustal motion to predict earthquakes and water flow • Planning construction of buildings and infrastructure • Planning evacuation routes and other emergency responses and reconstruction • Improving ship navigation and air and train safety • More efficient application of fertilizer and pesticide to lower food costs and reduce runoff of chemical pollutants

27. Summary of Benefits of CORS and GRAV-D, Leveson 2009 Scoping Study

28. Economics of Information • The value of information is in its ability to contribute to better decisions or to improve productivity, reduce costs or increase safety • The value of improvement in decisions is measured by comparing alternatives that have higher payoffs with those that have lower payoffs • The approach has been used when the probabilities of alternative outcomes are known or can be reliably assumed, for example in some agricultural, biological and environmental processes • Reduced costs can come when information improves search so less time and travel expense is needed, e.g. for navigation, finding locations and online shopping • Network effects from interactions of multiple participants sharing information can greatly increase benefits

29. References • Kite-Powell, Hauke , Use and Value of Nautical Charts and Nautical Chart Data in the United States, report to the NOAA Office of the Coast Survey, Woods Hole Oceanographic Institute, August 2007 http://docs.lib.noaa.gov/noaa_documents/NOS/NGS/Nautical_Charts_Data_2007.pdf • Leveson, Irving, Socio-Economic Benefits Study: Scoping the Value of CORS and GRAV-D, prepared for the National Geodetic Survey, National Oceanic and Atmospheric Administration, January 2009 http://www.ngs.noaa.gov/PUBS_LIB/Socio-EconomicBenefitsofCORSandGRAV-D.pdf • Leveson, Irving, Socio-Economic Study: Scoping the Value of NOAA’s Coastal Mapping Program, report to the Remote Sensing Division, National Geodetic Survey, National Oceanic and Atmospheric Administration, March 8, 2012 http://geodesy.noaa.gov/PUBS_LIB/CMP_Socio-Economic_Scoping_Study_Final.pdf • Leveson, Irving, The Economic Value of GPS: Preliminary Assessment, presentation to the National Space-Based Positioning, Navigation ad Timing Advisory Board, June 11, 2015 http://www.gps.gov/governance/advisory/meetings/2015-06/leveson.pdf • Miller, Benjamin J., “The Not So Marginal Value of Weather Warning Systems,” slides, University of California, San Diego, n.d.

30. Contact: Irv Leveson Leveson Consulting Ileveson@optonline.net www.levesonconsulting.com732-833-0380 cell 609-462-3112 fax 732-833-9986 10 Inverness Lane Jackson, NJ 08527-4047 A biography for this talk is at http://www.nauticalcharts.noaa.gov/ocs/hsrp/DC2015/bios/IrvingLeveson.htm